Media Appearances

CBDCs Shouldn’t Be the Only Form of Money, Central Bankers Say

CBDCs should complement, not replace, existing forms of money, according to leading officials at BAFT’s 2022 Global Annual Meeting.

Via Financial News

As central bankers in advanced economies consider launching their own digital currencies, top officials have warned that CBDCs should not replace existing payments systems entirely.

“The legacy system has been worked at diligently and hardened for decades,” Robert Bench, Assistant Vice-President at the Boston Federal Reserve, told a BAFT (Bankers Association for Finance and Trade) conference on 3 May.

“What we want to do is understand what are the costs or the benefits [of a CBDC], but not disrupt anything happening in the steady state, because so much work has gone into making the money system so secure.”

The Boston Fed has partnered with the Massachusetts Institute of Technology to investigate the technical feasibility of a digital dollar in an initiative dubbed Project Hamilton.

Bench said he was not yet confident that a digital dollar was technically possible.

“There’s no higher stakes than the US dollar. So to understand technical feasibility, the level of hardening you have to do so that institutions are comfortable offering these services to clients, that’s a long way away,” he said.

Tom Mutton, Director of Fintech at the Bank of England, said the Bank would be agnostic on potential use cases and business models for any CBDC.

“We should be in the infrastructure game, rather than the product game,” he told the conference.

The Bank has also partnered with MIT, entering into a one-year research agreement with the university to look at the technical challenges and opportunities of CBDCs.

In most advanced economies, central banks are either exploring or are in the early stages of developing a CBDC. Some 89 countries accounting for 90% of global GDP are currently looking at developing a CBDC according to the Atlantic Council, a Washington-based think-tank.

In April, the Bank and Treasury announced a CBDC taskforce to better coordinate research into a digital pound.

The increased attention around a CBDC does not mean one is on the horizon, however; the Bank has said not to expect a digital pound before 2025.

Both the Fed and the Bank are still in the research phase, and both central banks have said they would require approval from elected officials before moving onto the design phase.

A major concern that central banks have raised when discussing CBDCs is the potential of undermining the traditional systems fractional reserve banking and commercial money.

Mutton said the goal of the Bank’s potential digital pound is not to become the dominant form of money, but to serve as another payment option for consumers as cash use continues to decline.

“What we don’t see is a world in which a [CBDC] is the only form of money we use,” he said. “The predominant form of money we use to buy our groceries and go on holiday and anything else is currently commercial bank money. As we have a more digital economy and as we have lower levels of cash use, we continue to explore the case — or not— for making central bank money available in digital form.”

But while the Fed and Bank continue with their research, other jurisdictions are pressing ahead.

China’s e-CNY has been piloted in a number of cities around the country and was given a high-profile test run at this year’s winter Olympics. The People’s Bank of China reported that during the two-week sporting event, around $315,000 worth of e-CNY transactions were processed everyday.

European Central Bank president Christine Lagarde said the advanced stage of China’s CBDC project has spurred the ECB to move faster on its own digital euro project.